The Subprime Paradigm
Describing traders and lenders attitude towards risk mitigation during the period of easy money:
"Will this loan last long enough to get it out of my hands and into those of another individual."
Its plain to see why easy money led to our current problems, now the Fed wants to cure the problem, with more easy money?
The Fed and Legislative branch have recently socialised our housing market through higher GSE loan limits
and the banking system with the Feds triage on an insolvent and crumbling financial system.
Whatever happened to survival of the fittest and Adam Smiths free hand of capitalism?
As a naybob of simian nature put it so aptly: "The Free Hand now picks our pockets".
In the last phase of this Franken economics debacle, money was so easy, companies that should have failed were kept alive.
In the current environment of tight money and a failing non durable economic system,
these weaklings with severe operational problems and too much debt are going to start failing with "surprising" frequency.
This major correction in the corporate world has been overdue for at least a decade.
We have nattered and warned on numerous occassions about the consequences of
falling market cap meets economic downturn meets dwindling reserve levels meets debt downgrades meets debt defaults meets a tsunami of BK's.
You haven't seen the worst yet my little droogies... witness...
Rising defaults in a market where refinancing is all but impossible to get. Another reason why the end of this nightmare is nowhere in sight.
When all is said and done, the word "Subprime" will just be a paradigm for the credit markets overall.
Hattip to Bloomberg
U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit.
The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007.
The growth of leveraged loans, which include packages of high-risk bank loans called collateralized loan obligations, has grown to $558 billion from $14 billion in 1996.
The share of leveraged loans considered distressed was 16% at the end of March, the highest since 1997, based on loans trading below 80% of their face value.
The highest default rate for speculative bonds and loans since 1983 was 9.98% in 2001, during the last U.S. recession.
The average annual default rate over the same period was 4.48%, Moody's says.
Martin Fridson, chief executive officer of FridsonVision LLC, a high-yield research firm, predicted
that a recession as deep as the eight-month contraction that started in 1990 could push defaults to 16%.
Default rates may not rise along with a company's financial distress this time as they have in the past
because some companies got so-called ``covenant lite'' loans, without restrictions that can trigger defaults.
Even if a company's operating performance is sub-par, the bank issuers can't force them into bankruptcy because there are no covenants.
As a result, if a company does eventually file for bankruptcy, it will have even more debt, and less value.
"Will this loan last long enough to get it out of my hands and into those of another individual."
Its plain to see why easy money led to our current problems, now the Fed wants to cure the problem, with more easy money?
The Fed and Legislative branch have recently socialised our housing market through higher GSE loan limits
and the banking system with the Feds triage on an insolvent and crumbling financial system.
Whatever happened to survival of the fittest and Adam Smiths free hand of capitalism?
As a naybob of simian nature put it so aptly: "The Free Hand now picks our pockets".
In the last phase of this Franken economics debacle, money was so easy, companies that should have failed were kept alive.
In the current environment of tight money and a failing non durable economic system,
these weaklings with severe operational problems and too much debt are going to start failing with "surprising" frequency.
This major correction in the corporate world has been overdue for at least a decade.
We have nattered and warned on numerous occassions about the consequences of
falling market cap meets economic downturn meets dwindling reserve levels meets debt downgrades meets debt defaults meets a tsunami of BK's.
You haven't seen the worst yet my little droogies... witness...
Rising defaults in a market where refinancing is all but impossible to get. Another reason why the end of this nightmare is nowhere in sight.
When all is said and done, the word "Subprime" will just be a paradigm for the credit markets overall.
Hattip to Bloomberg
U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit.
The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007.
The growth of leveraged loans, which include packages of high-risk bank loans called collateralized loan obligations, has grown to $558 billion from $14 billion in 1996.
The share of leveraged loans considered distressed was 16% at the end of March, the highest since 1997, based on loans trading below 80% of their face value.
The highest default rate for speculative bonds and loans since 1983 was 9.98% in 2001, during the last U.S. recession.
The average annual default rate over the same period was 4.48%, Moody's says.
Martin Fridson, chief executive officer of FridsonVision LLC, a high-yield research firm, predicted
that a recession as deep as the eight-month contraction that started in 1990 could push defaults to 16%.
Default rates may not rise along with a company's financial distress this time as they have in the past
because some companies got so-called ``covenant lite'' loans, without restrictions that can trigger defaults.
Even if a company's operating performance is sub-par, the bank issuers can't force them into bankruptcy because there are no covenants.
As a result, if a company does eventually file for bankruptcy, it will have even more debt, and less value.
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